Progression of Japanese v. American Equities

Long EWJ position +2.98% unrealized, into which I reallocated from SPY -0.24% over the same period.

EWJ failed resistance at $10.70 today, likely to pullback in the short-term.

Pullback should be short & shallow since both daily and weekly fractals’ indicators show such bullish setups.

Will resume rally and fill earthquake gap up to $11 in coming weeks/month.

The monthly EWJ v. SPY overlay shows American markets largely overbought, Japanese in a bullish trend with indicators turned north.

The gambit: both the Fed & BOJ will ease again, but the Japanese will move far in advance of a quasi-QE3 plan.

I wanted to update the progress of my Japan ETF (EWJ) position, which remains open +2.98% as of the close tonight. Recall my comments (everything accounted for in real-time over at StockTwits):

I sold SPY at the top of Thursday’s [6/30] rally because “rally is too far too fast.” I reallocated into the Japan ETF (EWJ), a lower-risk/higher-return opportunity in equities…

SPY [daily chart] at the top of its trading range with the threat of bearish momentum divergence. EWJ shows no such reservations, with room to run north and a $10.75 resistance to fill gap…

The weekly chart shows Japan poised for a blockbuster 3q11, with EWJ ready to fill the gap all the way back to its pre-crisis level above $11.

Not only has the S&P 500 (SPX) fallen -0.24% since I sold, but Japan has rallied mightily… all according to plan. I’m going to do a chart-drop here, since EWJ has reached a big checkpoint…

First, notice the threat of a Head & Shoulders quad-top resistance, which EWJ failed to breach @ ~$10.70 today…

EWJ daily- Head and Shoulders a threat at resistance.

It’s very hard for me to extrapolate that trend, but my expectation is that in this short-term cycle, EWJ will not fill the March 2011 earthquake gap up to $10.80 nor $11. Indicators are just too overextended, showing momentum (MACD) and buyers’ enthusiasm (MFI) at giddy heights.

The weekly fractal shows the same resistance being met at the upper-bound of its trading range. Note the bullish setups in all indicators, which unanimously point to EWJ recapturing pre-earthquake levels. Again, this chart echoes the risk of a pullback from today’s resistance, but it should be short and shallow, rallying through to $11 in a matter of weeks/month:

EWJ weekly- bullish formation on all accounts, room to run higher after a pullback from top of trading range.

In a matter of a few quarters, the S&P 500 will outrun Japan indices. For now, SPX has a few hurdles en route to my 1425 target, even though it’s back above its last Fibonacci retracement level. I’ll be sure to take notes in 3q11 about the hand-off from Japanese stock leadership to American.

I’m sticking to that, despite the tone of this entry. Take a look a the development of the monthly EWJ v. SPY overlay, the final piece to today’s puzzle. Therein, you can see why today I prefer Japan, whose long-term fractal shows turning (vs. SPX’s topping) momentum, a positive trend, and more buyer interest at its back:

EWJ v SPY monthly (1996-present)- note the differences: EWJ’s positive trend, SPY at the top of its range, EWJ momentum trying to turn.

In playing this card, I’m wary that SPX has a tendency to persist in overbought territory for longer than any other global equity market–a byproduct of disinflationary policy that’s virtually unattainable in this modern ZIRP economy. The Fed & Treasury will nevertheless maintain easy monetary policy as long as they can. Similarly, Japanese policymakers have summoned monetary easing throughout their Lost Decade. While I acknowledge that BOJ liquidity yields marginally less stimulant than even the Fed’s, Japanese easing will far precede any quasi-QE3 plan from the Americans. As a consequence, I’m willing to stay long Japan for relative strength until the paradigm shifts (i.e. these indicators break down).

The aforementioned H&S in the daily chart is an awkward, skewed formation of a neo-classical breed. I don’t trust such technical patterns. I expect more big things from EWJ due to that + bullish daily indicators + a bullish weekly chart + a relative strength overlay against SPY.